Bad weather depresses housing starts in February

A VDOT (Virginia Department of Transportation) snow plow clears snow after a heavy snowstorm in Great Falls, Virginia February 6, 2010.

WASHINGTON (Reuters) - U.S. housing starts fell last month as winter storms disrupted construction, and another drop in building permits suggested the weakness would linger.

Though the data on Tuesday was an indication home building would clip economic growth in the first quarter, it was not as weak as analysts had expected, and groundbreaking for housing in January was revised significantly higher.

The Federal Reserve left benchmark interest rates unchanged near zero and renewed its pledge to hold them "exceptionally low" for an "extended period," even as it acknowledged economic activity continued to strengthen.

Fed officials also noted that housing starts have been flat at "a depressed level.

"The numbers suggest we are going to lose the support of homebuilding at least temporarily, probably this quarter or next. That will limit some of the improvement in GDP and final sales in particular," said Aaron Smith, a senior economist at Moody's Economy.com in West Chester, Pennsylvania.

Groundbreaking activity fell 5.9 percent to a seasonally adjusted annual rate of 575,000 units, reversing the prior month's gain, the Commerce Department said. Markets had expected housing starts to fall to 570,000 units.

New building permits, which give a sense of future home construction, fell 1.6 percent to a 612,000-unit pace last month, dropping for a second straight month. That compared to analysts' forecasts for 610,000 units.

Investment in new home construction made a small contribution to fourth quarter gross domestic product.

Stocks were little moved on the data, rising after Standard & Poor's affirmed its ratings on Greece and ended its review for a downgrade. They extended gains after the U.S. central bank vowed to hold benchmark lending rates exceptionally low.

Prices for U.S. government debt extended gains on the Fed's low rates commitment, while the dollar fell against the euro.

Actions varying from enactment of a government tax credit for first-time buyers, purchases of mortgage-backed securities by the Fed and private loan modifications have supported home sales and slowed the decline in prices.

In a statement to the House of Representatives Appropriations Committee, Obama administration officials said while the economy was far from healthy, its trajectory had changed from "uncontrolled freefall to approximate stability."

SIGNS OF HESITATION

Even without the weather-related disruptions, the housing market's recovery from a three-year slump is showing signs of hesitation. Home-builder sentiment slipped this month on worries over lack of credit for new projects and a wave of distressed properties hitting the market.

Such properties typically sell below value and could crowd out the market for new homes.

"The problem is that the market is saturated with excess supply. Some of this excess may be reduced by a surge in sales ahead of the end of the tax credit, but the bulk is going to take a very long time to work off," said Paul Dales, a U.S. economist at Capital Economics in Toronto.

The government revised January's housing starts upward to 611,000 units from the previously reported 591,000. Compared to February last year, starts were up 0.2 percent.

Groundbreaking for single-family homes fell 0.6 percent last month to an annual rate of 499,000 units in January. Starts for the volatile multifamily segment fell 30.3 percent to a 76,000-unit annual pace.

With home sales weakening in recent months, new home construction is no longer running below sales, a factor that had helped to lower the supply of homes on the market over the last two years.

Analysts said this will put downward pressure on new home construction. Still, they said an improvement in the labor market and the broader economic picture will prevent another collapse in housing. A rush to take advantage of the extended and expanded tax-credit could bump up sales.

Prospective buyers have to sign contracts before April and close them by June to benefit from the tax rebate.

"Our view is that much of the benefit from the tax rebate has been realized," said Moody's Economy.com's Smith.

There are also concerns that the winding up of purchases of mortgage-backed securities by the Fed at the end of this month could push up home loan rates.

Separately, import prices fell 0.3 percent in February as the cost of crude oil and other petroleum products tumbled, the Labor Department said. It was the first monthly decline since July and pointed to benign inflation pressures.

(Additional reporting by Doug Palmer; Editing by Andrew Hay and Padraic Cassidy)